The Morning Risk Report: Much Ado About DPAs

Wall Street Journal

Two starkly different views were offered last week of one of the Department of Justice’s increasingly-used tools: deferred prosecution agreements. Depending on who you asked, DPAs, as they’re called, either incentivize ethical corporate behavior and help prosecutors uncover wrongdoing, or give the public the impression justice can be bought.

DPAs and their cousins, NPAs (non-prosecution agreements), allow companies to resolve criminal charges without pleading guilty. Essentially, under most DPAs, companies admit wrongdoing, pay a fine and agree to cooperate with the Justice Department and clean up their act. In return, prosecutors agree to drop the charges after a set time period (usually two to three years) if the terms are met. These settlements have taken heat lately, because some feel they let companies off the hook. Critics point to the DOJ’s DPA with HSBC Holdings PLC over money laundering charges. When grilled about why the bank avoided a guilty plea despite admitting to laundering money for drug cartels and breaking international sanctions, Attorney General Eric Holder said HSBC and its ilk are too big to prosecute.

Denis McInerney, a deputy assistant attorney general in the Criminal Division, forcefully defended the use of these agreements during a panel discussion at the National Press Club in Washington, D.C., Friday. According to McInerney, before the advent of DPAs, which have existed for about 20 years, prosecutors frequently chose to avoid criminal prosecution of corporate malfeasance rather than put their case to a burden of proof, the “dark ages” as he called it. Now armed with these settlements, prosecutors can reward companies for reporting violations and bolstering compliance, while securing cooperation from the companies that leads to other cases. “I expect that some would disagree with this, and I would disagree with them,” McInerney said.

One such dissenter was Michigan Law professor David Uhlmann. Uhlmann, a former DOJ prosecutor, said settlements over corporate malfeasance lose something “essential” when they are not labelled criminal. The ability to threaten criminal prosecution without having to ultimately go to court gives prosecutors improper leverage, he said, while eroding public trust in the justice system. According to Uhlmann, prosecutors should either bring a case or not bring a case. “What this is about, is a profound ambivalence within parts of the department about the very notion of corporate criminality,” Uhlmann said. Needless to say, McInerney did not agree.

EXCLUSIVE ON RISK & COMPLIANCE JOURNAL:

Cyber Compliance: Critical Infrastructure’s Weakness(the fourth in a series) If a company has customer data hacked it can lead to fraud, unexpected costs and reputational damage. If a company operating in one of the many fields known as “critical infrastructure” has its security systems breached that could lead to far more serious results such as the loss of energy supplies or compromised water quality. Such companies–which according to a White House policy directive span 16 sectors, including financial services, communications, food and agriculture as well as utilities–face a particular complication in their use of subcontractors.

Terrorism insurance premiums rise. The bombings at the Boston Marathon are likely to change the way insurance companies create and price their terrorism insurance coverage, especially for events taking place outdoors and over long distances. One change already is occurring: Those buying terrorism insurance will pay more for it. “There is a reduction in the amount of cover being offered and an increase in prices for this type of cover,” said Gordon Woo, a catastrophist at catastrophic risk modeling company Risk Management Solutions, said. “There is a reduction in the amount of cover being offered and an increase in prices.”

Turkcell drops suit. A Supreme Court ruling narrowing the scope of the Alien Tort Statute claimed its first high-profile victim. Turkcell Iletisim Hizmetlera AS, Turkey’s largest mobile phone operator, said in a court filing it has dropped its Alien Tort claim against South Africa’s MTN Group Ltd. The suit alleged bribery and other acts of corruption by MTN caused Turkcell to lose out on a license to operate a mobile network in Iran.

Breen on the False Claims Act. George Breen chairs the steering committee for the health care and life sciences practice at law firm Epstein Becker Green. In a Q&A he talked about enforcement of the act, the implications for compliance officers and the involvement of executives and the board.

GOVERNANCE

Buybacks a boon for some executives. Stock buybacks appear to be making an impact on executive pay. As companies ramp up repurchases, compensation targets tied to per-share earnings are helping boost executive pay, the WSJ’s Scott Thurm and Serena Ng report. The link worries some investors and compensation advisers because the figure is too easy to manipulate. “If you’re a CFO or a top executive, you can determine if the EPS goes up or not based on a stock buyback,” says Robin Ferracone, CEO of pay consultant Farient Advisors.

ISS calls for new blood at J.P. Morgan. ISS has recommended investors withhold their support for three J.P. Morgan directors, citing “material failures of stewardship and risk oversight” in the wake of a big trading loss last year, DealBook reports. The firm urged shareholders not to vote for David M. Cote, James S. Crown and Ellen V. Futter. “The company’s board is in need of refreshment and it should begin searching for seasoned directors with financial and risk expertise,” ISS wrote in a report on the bank. ISS backed, as expected, a proposal to split the roles of chairman and chief executive.

COMPLIANCE

Dell investigates alleged Syria sales. Dell Inc. is looking into allegations a re-seller did business with Syria, Bloomberg’s Michael Riley and David Beasley report. The PC maker says it requires its re-sellers to follow U.S. trade requirements, which ban sales to Syria. Bloomberg notes Syria acquired Hewlett-Packard computers from an H-P partner firm. That equipment is used for Syria’s surveillance system. The partner firm told the SEC last year it did not know where the gear was being shipped.

Leniency for offshore cheats. U.S. courts are doling out more lenient punishment to tax evaders hiding money offshore than to other tax cheats, the WSJ reports. Despite a high-profile government crackdown on secret offshore financial accounts since 2009, the average sentence in those cases has been about half as long as in some other types of tax cases, according to a comparison of Internal Revenue Service statistics and data compiled by former U.S. Justice Department lawyer Jack Townsend. In many cases, judges are opting for shorter sentences than recommended under federal guidelines.

Singapore’s money laundering crackdown. Banks in Singapore are urgently scrutinizing their account holders ahead of new rules on tax evasion, reports Indian Express. Singapore has become the fourth-biggest offshore financial center in the world, but the government is tightening its rules to head off any heightened scrutiny from international regulators. After July 1, financial institutions that handle the proceeds of tax crimes will be subject to criminal charges under changes to the city-state’s anti-money laundering law.

Online shopping tax bill could struggle in House. A bill that effectively would end tax-free online shopping appears to be sailing smoothly toward Senate passage Monday but will hit choppier waters in the Republican-controlled House, where anti-tax sentiment is stronger. Supporters cast the bill as an issue of fairness, says the WSJ, saying brick-and-mortar stores are hurt as consumers increasingly check out merchandise in shops but buy the products online. Many House Republicans are sympathetic to that argument but are reluctant to embrace legislation constituents could see as a tax increase, wary of a potential grass-roots voter backlash. Many of these legislators are silent on the issue or vague about their intentions.

REPUTATION

Chinese probing Yum meat supplier. Shanghai authorities say they are investigating meat from a wholesaler that supplies a restaurant chain owned by Yum Brands Inc., the latest food safety scare to hit the fast-food company in China, its most important market, the WSJ reports. According to a statement from the Shanghai Municipal Food Safety Committee, city inspectors and police recently raided a Shanghai-based wholesale market, seizing meat branded “New Zealand Sliced Lamb” that lacked production or ingredient labeling. Authorities are conducting DNA tests to determine the composition of the meat, the statement said. A Yum spokeswoman didn’t respond to requests for comment Monday.

J&J recalls children’s Tylenol in South Korea. Johnson & Johnson is recalling all bottles of Children’s Tylenol it made and sold in South Korea after finding high levels of the main ingredient, a company spokeswoman told the WSJ. The recall doesn’t affect any products sold in the U.S. J&J’s Janssen Korea unit withdrew 1.7 million bottles of Children’s Tylenol in South Korea on April 23, after routine quality-control testing detected concentrations of the key ingredient, acetaminophen, that were “slightly out of specification” in some bottles, said the company spokeswoman. J&J said the health risk is remote, and it hasn’t received any reports of harm.

DATA SECURITY

Hackers compromise U.S. government site with zero-day exploit. Hackers compromised a website belonging to the U.S. Department of Labor last week. Pages detailing nuclear-related illnesses were modified with malware that could compromise visitor computers via a zero-day vulnerability, eWeek’s Robert Lemos reports. The attack appears to be a watering hole attack, where the attackers plant malware in a website they believe will attract their intended targets.

Three-year hunt nabs hacker. Hamza Bendelladj, an Algerian national who was allegedly a fixture on hacker computer forums selling a supporting a popular tool for hijacking banks accounts, appeared before an Atlanta courtroom last week. He was arrested in Bangkok. Mr. Bendelladj faces 23-counts on crimes including computer and bank fraud. “SpyEye, which can be purchased for as little as $2,000, helped turn hacking into an easy and lucrative occupation and drove a cybercrime boom that has drained tens of millions of dollars from bank accounts in the U.S.,” reports Bloomberg’s Michael Riley and David Beasley.

Many executives express concerns about their existing cyber incident response plans, despite a number of high-profile breaches. The uncertainty surrounding cyber incident response presents an opportunity to educate the executive team on cyber resilience, the coordinated set of enterprisewide activities designed to help organizations respond to, and recover from, a variety of cyber incidents, while reducing their impact to business operations, cost and brand damage.

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Risk & Compliance provides news and commentary to corporate executives and others who need to understand, monitor and control the many risks that can tarnish brands, distract management and harm investors. Its content spans governance, risk and compliance and includes analysis of the significance of laws and regulations, the risks inherent in global expansion and the protective moves taken by companies.